JF1012: $6,000 POCKETED from His Property Manager and How He Dealt with Fraudulent Activity #SituationSaturday
It’s unfortunate, but there are property managers out there that will take money from your wallet…even inadvertently. Because it’s a thankless job, many things can go wrong, and you may be the one taking the loss. Hear about our guest losing big money to his property manager in what he did about it.
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Marco Santarelli Real Estate Background:
– Founder and President of Norada Real Estate Investments
– Host of the Passive Real Estate Investing show, where people like you learn how to build substantial passive income while creating wealth
– Creator of DealGrader™ – a scoring system that measures the investment quality of a real estate investment
– Purchased his first real estate investment at the age of 18 and is licensed broker in California
– Based in Orange County, California
– Say hi to him at http://www.noradarealestate.com/
Click here for a summary of Marco’s Best Ever advice: http://bit.ly/2rfsND4
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
I hope you’re having a best ever weekend. Because it is Saturday, we’re doing a special segment called Situation Saturday, where we talk about a specific challenge that our Best Ever guest had and how he/she overcame it. Today we’re speaking to a he, so how HE overcame the situation.
We’re gonna be talking about, well, if you have a challenge with a property manager that is ripping you off; in this case, the property manager had stolen six thousand dollars in collected rents in one month from today’s guest. How are you doing, Marco Santarelli?
Marco Santarelli: Hey, Joe. I’m doing great, how are you doing?
Joe Fairless: I’m doing well, nice to have you back on the show. Best Ever listeners, you can hear Marco’s Best Ever advice by simply searching Marco Santarelli at BestEverShow.com, and you’ll be able to hear his episodes.
He is the founder and president of Norada Real Estate Investments. He is the host of a wonderful show called “Passive Real Estate Investing”, where people like you learn how to build substantial passive income while creating wealth. He is the creator of Deal Greater, which is a scoring system that measures the investment quality of a real estate investment. He is based in Orange County, California.
He bought his first rental property at the age of 18. You can hear his story, again, on a previous episode. We’re gonna focus today on this challenging situation. But you know what, before we do that, Marco, do you wanna give the Best Ever listeners just a refresher on your background and your current focus?
Marco Santarelli: Sure, Joe, and thanks for having me back on the show, I’m very honored. Just real quick, I jumped into real estate investing at the age of 18; I just knew that real estate was a wealth creator just by looking at other people around that were quietly and slowly creating some amazing wealth. So I just literally jumped in, bought a property, fixed it up, put a sign out in front, took some applications, screened some tenants… I had no idea what I was doing. I was kind of going based on gut instinct, but I leased it, managed it for several years, and then ultimately I ended up selling it, which was my biggest regret, because it was about a $40,000 property at that time, many, many years ago, and it’s about a $400,000 property today. If there’s any takeaway here, it’s “Never sell your portfolio.” Yes, you can transfer the equity and do a 1031 exchange, but never sell. Keep the equity and keep building cashflow.
Fast-forward to 2003-2004, again, to make a long story short, I kind of jumped back into real estate investing full-time at that time, and this will segue into what we’re talking about today, by the way… But I jumped back into real estate investing full-time, and I noticed a need that investors all around me were spending lots of time and money educating themselves and doing a good job of it, but they still weren’t pulling the trigger. At the end of the day, unless the rubber meets the road, you’re not gonna build a portfolio and create wealth for yourself or create financial freedom. So the entrepreneurial mindset is “Find a need and fill it.” Well, the need at the time was helping these investors that wanted to build real estate get into it. That’s how the business was born.
I mention that because that only came to be because I was out there doing it. I was out there finding the deals, negotiating them, putting them together and buying real estate for myself. I bought a lot of property in a very short period of time and I learned a lot from it, but at the same time I made a lot of mistakes.
Joe Fairless: What we’re gonna talk about today – it might be a mistake on your part, but certainly when someone is committing fraud or just stealing from you, then most of the onus is on them for what was going on. Tell us the story… I gave the little teaser of how at one point you had $6,000 in collected rent stolen in one month; can you give us the back-story and just tell us what happened?
Marco Santarelli: We put a lot of trust in our property managers within our company, and on the podcast I always half-jokingly say that “You live and die by your property manager.” The reality is that property management is a thankless job. It’s very important, and you really need to think of your property manager as an asset manager, not just a property manager… Because they’re managing your assets, so it is a critically important position. When you hire them, you need to hire them well.
Well, I kind of side-stepped this whole thing in choosing the right person. I had built trust in a real estate agent in the [unintelligible [00:06:56].17] back in 2003-2004 that I used extensively to help me find and source deals. She kept bringing me opportunities and I really put her to work; I was submitting lots of contracts, a lot of offers on properties to try and find the right deals at the right price that work for me.
She was very helpful, and I grew to know her and trust her, so I took it for granted that she could help me and do a good job in the management side of things. The problem was that she was a full-time real estate agent and a part-time property manager. Yes, she was licensed, yes, she was qualified to do it, but she wasn’t an experienced real estate investor and I don’t think she made a heck of a lot of money as a real estate agent, because for the most part I was buying 40k, 50k, 60k and 70k properties. Real estate commissions are not very large when you’re only making 3% of the sales price.
Anyway, I hired her as my property manager, and she was managing dozens of units for me. Because I was in low-income areas, the tenants paid cash. It was either a money order or cash, so she was collecting cash. You can imagine that when you start to stack up hundreds of dollars or thousands of dollars every month in collecting rents, it starts to look pretty enticing.
If you’re not making as much as you’re collecting in rent for other people i.e. your client (me), I think the temptation starts to grow on you. I didn’t find this out early on, but it started to grow suspicious and become fishy as the months rolled by where I was getting less and less in rent and there were more and more defaults or late payments… So I started to question things and I started to fly out and check on things a little more often. What I came to find out is that 1) those money orders were being given to her nameless or made out in her name. I don’t wanna say her name, but she basically was telling the tenants that “You need to make them out to our company, or the property manager on behalf of the landlord.” Well, no, that’s not what you should be doing, but she did.
Where this all came to a head is in one month where I had my largest collection of rent – and she literally told me this on the phone, she said “I’ve collected $6,000 for this month”, and I said “Great, let’s send it to me…” She told me that she put it in a UPS overnight envelope, dropped it off at the UPS store and I should have it the next day or in two days.
Well, it never showed up. Days went by and still there was nothing, so I called her and I said “Are you sure you dropped that off? Are you sure you mailed that?” and she claims that she did. I can’t believe what she said, because I wasn’t there. Long story short, all I know is that she claims to have dropped it off at the UPS store and went back to double-check and make sure that it was sent. The fact is that either she took it, which is what I have come to believe, or she dropped it off at the UPS store and one of the employees knew what was in the envelope and stole it.
Basically, I lost thousands upon thousands of dollars of rent over the course of a number of months, only because it was theft; it was nothing more than theft.
The bottom line here is you need to work with a professional full-time property manager that is ideally in or part of a bigger company. If you’re dealing with a real estate agent and/or a part-time property manager, it could lead to trouble because there’s no accountability, there are no checks and balances. If you are dealing with a property management company, even if it’s just a company of three people, at least you will have systems in place, you’ll have people that you can contact and they can report back to you. I think that’s the lesson learned here with this mess.
Joe Fairless: So the two takeaways that you mentioned – full-time, not part-time, and part of a larger company. The full-time versus part-time – that makes sense; part of a larger company – that makes sense. Any other tips for the listeners as you look for property managers, how to find the best property managers?
Marco Santarelli: Definitely, and you really hit some key words there… Full-time, not part-time. Professional, meaning that this is what they do as their profession, their living; they’re not part-time this and part-time that. This is really what they do as their career, their profession; this is their expertise. In many states, they need to be licensed in order to do that, so that’s one qualification criteria right there – do they have their real estate license? Whether it’s an agent’s license or a broker’s license. If it’s a one-man show, that probably won’t be your best way to go, because you have no redundancy; there’s a single point of failure. If this person gets sick or gets hit by a bus, what happens? You have no one to contact, you have no one collecting rents; you have one single point of failure, so you need a company that has redundancy.
Here are some tips for finding or hiring that best property manager; for your Best Ever listeners, here’s a way to find the best manager. One thing you wanna find out is how many properties they are managing. If they’re only managing one, two, three, five or ten, this is very much a part-time endeavor. But if they’re managing 100, 200, 300, then you know it’s a serious business. You wanna stick to companies that obviously do this day in and day out and have the network of people in place to manage your property.
The second thing you might wanna find out or ask them is do they own any rental properties themselves? Now, this can go one of two ways… It’s kind of like section 8 – people either love section 8 tenants or they have section 8 tenants. The property manager, if they own their own rental property, then they understand what being a landlord is like and what they would expect as a property manager. They have expectations, so they might be delivering and giving you the service and the communication that they would want as an investor.
The flipside of that, which is arguable, is if they own their own portfolio of properties and they have a vacancy and you have a vacancy, is there a conflict of interest there where they’re going to fill their vacancy first over yours? So that’s up to you to decide whether it’s a good thing or a bad thing whether they own rental properties themselves or not.
A critical component is “Do they inspect or visit those properties on a regular basis?” I think most management companies will go once per year, but if they make it a routine to go once a quarter or once every six months as just either a scheduled inspection or a random inspection where they just drop by just to even look in the door and just say “Hey, I’m just in the neighborhood, I wanna see if everything’s okay.” They can look through the door, maybe they can just say “Do you mind if I come in and just take a quick look around and just make sure everything’s okay?”
Those inspections just keep the tenants on their toes, but it also allows you to find out through the property manager the condition of the property and the tenants and just to make sure things are running smooth.
Kind of a more intangible thing is “Does your property manager try to make you happy? Are they going out of their way to accommodate you and to make sure that they’re meeting your needs and expectations?” If they don’t have time to talk to you or they’re rushing you off the phone or their e-mails are very short, that’s not a good sign. It shows they don’t care enough to take care of you the right way, or maybe they’re too busy for their own good. So when an issue does come up, are they spending the right amount of time to address your needs and concerns and the problems that you’re having with your property? So it’s all about customer service. You wanna make sure that they’re keeping you happy.
This is a very basic one, but do they have systems in place? A lot of property management companies today have cloud-based software, propertyware where income and expenses are reported, notes on your account is captured and reported and you don’t need to call the property manager; you can just literally sign in from any web browser and just see the state of your property and see what the accounting is like and what expenses were made over the last month or the last year. If they don’t use systems, they’re really behind the times, because you have to have these online tools to operate today.
Then just a couple more tips… Their fees – most management companies are 8%-10% of collected rents; 10% – you can call it the street rate, if you’re just walking off the street. But generally, they’re going to be around 8%-10%, and they’re negotiable, especially if you have a larger portfolio. If you have many units, that rate could be driven down. But the important point here is make sure that the percentage that they’re charging you is on collected rent, not on scheduled collections… Not what is expected to be collected, but actually what they actually collect. Then there’s motivation to perform, and if that property is not performing – in other words, if you’re not collecting rent every month, they’re not making a profit.
Joe Fairless: Do they actually try to do a fee off of scheduled rent, not collected rent? I’ve never heard of that.
Marco Santarelli: Yes, some of them do. You have to read the agreement very carefully before you sign a management agreement with a property management company. Fortunately, most of them do it off of collected rent, but some of them will do it on what is expected. If they sign a one-year lease with a tenant and the tenant is paying fine for eight months and then the ninth month comes along, the property management company still expects to be paid, and they’re gonna take it out of your account if they have to, or they’ll collect it once they do collect rent from the tenant going forward. In other words, they always get paid, but you might not get paid. You don’t wanna be in that situation, definitely not.
My seventh tip would be… I guess just know how they’re going to address maintenance issues. Do they have in-house maintenance staff? A lot of them have in-house handymen that can handle most maintenance issues, a lot of them will outsource it. But it’s really more of understanding how they handle it and are they charging you a fee?
It’s not uncommon for them to tack on let’s say a 10% maintenance management fee on top of whatever that bill is on the maintenance issue. So it’s not that that shouldn’t be there, it’s just know what it is before you get into a management agreement.
Joe Fairless: Those are seven tips that will help us, for sure, identifying the right property management company and the wrong property management companies and choosing the best one. Then on top of that, I love the thoughts on the full-time management manager who is working for a larger company, so there’s more accountability.
Marco, where can the Best Ever listeners get in touch with you?
Marco Santarelli: There’s two websites. If they want more information on real estate investing, especially on the passive side, it’s just our podcast at PassiveRealEstateInvesting.com, but all of our properties that are in markets all around the country are on NoradaRealEstate.com.
Joe Fairless: Awesome. Well, the seven ways to screen a property management company… One – how many properties are they managing? Two – do they own any rental properties? Again, you said that could go either way. Three – do they inspect properties on a regular basis? Four – are they gonna meet your expectations? First you have to define what your expectations are – responsiveness, the level of communication you expect to receive, and then are they going to reach those expectations, exceed those expectations? Five is what software do they use? I’ve had management companies that have no software or old-school software, and it was a hot mess; you’ve gotta make sure they have the right software, maybe get some sample reports that they will provide you.
Six – the type of fees. Holy cow, if anyone tries to charge you off scheduled collected, not actually collected rent, run the other direction. Then lastly, how they handle maintenance and the fees that are charged. Make sure you’re budgeting into that. And we already talked about the full-time manager working at larger companies. These by no means are absolutes, but certainly if you follow them you’re going to mitigate the risk for having a bad property manager, one who takes $6,000 or $8,000, or whatever that number is — I think it’s $6,000 in rent, or it just disappears… Regardless of whatever happened to it, it just disappeared either way.
Marco, thanks for being on the show. I hope you have a best ever weekend. I always enjoy having a conversation with you. We’ll talk to you soon.
Marco Santarelli: You too, Joe. Thank you.